Taxing Hoosiers

Are Indiana’s taxes too high? Do we spend enough on public services?
Those are two persistent questions that cannot be answered.

The best we can do is compare ourselves to other states. Even then, the
comparisons are not necessarily meaningful. A few simple examples reveal
the futility of seeking answers to these complex questions.

Do we spend enough on snow removal? How can we compare ourselves to Florida
on such a question? They have virtually no snow and the snow they get
melts very quickly when it does fall. Hence, they have no need to spend
any money on snow removal. Indiana does have heavy snows and its citizens
require, even demand, that the snow not be left to melt on its own.

How should we compare Indiana to other states? National data gives big
states like California more weight than if we used an average. But averages
of all states let the less-populated states (North and South Dakota, for
example) have a greater bearing on the results.

What is the proper measure of taxation and spending? The most common
approach is to use either tax collections and expenditures per capita
or as a percent of personal income as the basis for comparison.
But a state with fewer children will show lower spending by either measure
because they do not have as many students to educate. And neither measure
tells us anything about the distribution of taxes and spending in relation
to business or in relation to the rich and the poor.

What the Data Tell Us

Given all of these warnings, we can get a generalized picture of taxation
and government spending in Indiana. These data are for the fiscal year
2000, as compiled by the U.S. Census Bureau and organized by the Rockefeller
Institute.

Indiana derived 82.6 percent of its state and local revenues from its
own sources and 17.4 percent from the federal government. At the national
level, the figures were only slightly different: 81.1 percent and 18.9
percent, respectively. Why? Indiana has fewer federally supported activities.
We do not have as many miles of road as geographically larger states.
We have fewer military bases and no Indian reservations.

Of the revenue Indiana derived from its own sources, 66.6 percent came
from taxes compared to 69.8 percent nationally. Indiana uses various charges
and miscellaneous fees more often than other states. Figure 1 shows that
Indiana is more dependent on property and individual income taxes than
other states.

Tax revenues in Indiana amounted to $2,707 per person, while nationally
the figure was $3,126. This means that the average Hoosier paid $419 or
13.4 percent less in state and local taxes per person than did the average
American. For Hoosiers, state and local taxes were 10.6 percent of personal
income compared to 11.2 percent across the nation. Did we get away cheaply
or are we just cheap?

How We Spend Money

As Figure 2 shows, a greater portion of spending in Indiana goes to education
than in other states. But that does not mean we spend more than other
states. In every area of governmental activity other than higher education,
Indiana spends less per capita than does the nation (see Figure 3). Should
we cut back on higher education to meet the national standard in order
to raise our spending in other areas?

One way to answer that is to look at our overall level of spending.
State and local government expenditures in Indiana are equivalent to 18.6
percent of our personal income. Nationally, the figure is 19.3 percent.
Hence, to be even with the nation, which may be under-investing in the
public sector, we could spend another 0.7 percent of our personal income
on government services. This would have amounted to an increase of $1.1
billion in spending in fiscal year 2000 … a small price to pay to
achieve mediocrity.

Morton J. Marcus
Director Emeritus, Indiana Business Research Center,
Kelley School of Business, Indiana University